22nd May 2023
Historic figures for Japan’s stock market
In the late 1980s, the ground beneath the Imperial Palace in Japan was said to be more valuable than the entire state of California. But the responding crash in asset prices after the bubble burst represented one of the biggest destructions of shareholder capital in stock market history.
After two decades of low growth and falling prices, the benchmark Nikkei 225 index rallied to its highest level since 1990 on Friday – as the G7 leaders gathered in Hiroshima. This comes after smashing through 30,000 earlier in the week, too. Strong corporate results, a weaker yen and an economy that’s starting to rebound after the pandemic are all to thank.
This optimism was boosted by the news that the world’s third-largest economy grew at an annualised rate of 1.6% between January and March – twice as fast as expected. Two straight quarters of contraction in the second half of 2022 was enough to lift the country out of recession.
Mounting signs of a slowdown in US, European and Chinese growth dampen the outlook for Japan’s export-reliant economy and only time will tell whether their current numbers can last. Some are also concerned that the Bank of Japan could be too slow in normalising its ultra-accommodative policy and risk inflation overshooting even further. Japan’s Consumer Price Index experienced a notable acceleration, reaching 3.5% and exceeding expectations by a considerable amount.
China’s industrial, retail and property markets are losing steam
With China’s wobbly post-COVID recovery, it wasn’t a surprise that their central bank kept interest rates on hold on Monday, but some monetary easing is likely in the coming months to support economic recovery.
On a positive note, China overtook Japan during the first quarter of the year to become the world’s biggest exporter of cars. They exported 1.07 million vehicles, which is up 58% compared with the first quarter of 2022.
This boost has been in no small part due to the rise in demand for electric vehicles, but it has also benefitted from trade sanctions imposed on Moscow by Western countries. Its market share in Russia has surged after rivals, including Volkswagen and Toyota, quit the country.
The G7 discuss further Russian sanctions
A major discussion at the G7 summit was the impact of Russian sanctions. Data confirms that eurozone economic growth advanced 1.3% year-on-year in the January–March period. The EU’s decision to halt most of its energy purchases from Moscow following the Ukraine invasion meant imports of Russian oil and gas to the region decreased by 72% compared to the previous year. The net trade balance of the region shifted to a surplus.
The EU’s trade deficit with China, the bloc’s second-largest trading partner after the US, also fell in the first quarter as it seeks to reduce its dependence on Beijing.
The future of interest rates in Europe and the US
Meanwhile, as inflation continues to run well over three times its 2% target, a Reuters poll of economists forecast the European Central Bank will hike interest rates by 0.25% at each of its next two meetings.
A similar poll suggested the US Federal Reserve will hold its key interest rate steady this year despite an expected recession. Solid retail sales figures for April boosted hopes that consumer spending will continue to support the economy as the delayed effects of the Fed’s policy tightening broaden out. It seems the Fed views a mild recession as an acceptable price for bringing inflation back down to target.
Wall Street stocks hit their highest level in nine months midweek, and global shares hit a one-month high as markets reflected increased hopes of a deal over the US debt ceiling. But US equities ended the week on a soft note as talks between the Democrats and Republicans broke down again, with no additional meeting set. Wrangling between the two political parties could take negotiations down to the wire or to a stop-gap agreement that kicks the can down the road until September.
Mark Dowding of BlueBay Asset Management commented:
“For now, financial markets remain relatively sanguine about the upcoming debt ceiling. It appears there is a widespread acknowledgement that, when all is said and done, the US Administration won’t possibly allow itself to default on its debts and wreak havoc on the global financial system. In a sense, having witnessed past skirmishes related to the debt ceiling, there is a sense of the story of the boy who cried wolf too many times.”